Governance, Urban Development, Infrastructure
Economic Development, Community Development

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Rethinking the Limits to Auckland (May, 2009) by Phil McDermot and Richard Dunbar

 The Government’s recent decision to review planning limits on city expansion is timely for Auckland.  Environment Minister Nick Smith says in setting limits councils have been ignoring the impact on housing costs.  He is supported by the evidence, but the costs of getting it wrong go further than housing.   

The reasons for even having urban limits change regularly.  In the 1980s they were promoted under the Town and Country Planning Act to protect “prime” agricultural land.  In the 1990s resource management was the justification.  In 2007 the ARC’s Auckland Sustainability Framework promoted them as the path to sustainability.  Most recently, ARC Councillor Walbran commented that in protecting metropolitan limits the council is “keeping its eye on the economic ball”.

City limits begin to look suspiciously like a planning tool in search of a policy objective. 

This rigidity is ill-founded. In the 1990s Auckland’s councils and the Ministry for the Environment resisted the ARC draft Regional Policy Statement on the grounds that drawing strict urban limits was trying to control land use. They claimed that this went beyond the ARC’s mandate, directed at water, air and soil quality.

To avoid a drawn-out legal battle and in the interests of cooperation, the Regional Growth Forum was established.  Through it, councils jointly considered options for Auckland’s growth.

Analyses led officials advising the Forum to conclude that there was not a lot to choose among Auckland’s growth options. From this, they inferred that imposing strict limits to growth would not impose undue costs. 

Serious concerns were raised over this interpretation. The analysis omitted the impact of changing employment distribution and only measured average costs across the region.  These were dominated by what was already in place, and obscured the differences among growth options.

The Growth Forum acknowledged this.  The Chairman, Phil Warren, wrote that “the final strategy should be pitched at a higher level of generality than is currently the case … It should also address more explicitly the need for a high degree of flexibility.”  The Growth Strategy, he said, is “a visioning and conceptual process” and not a “District Plan type document”. 

Flexibility and visioning disappeared when the Local Government Auckland Amendment Act (2004) inexplicably required this unproven and flawed strategy to be written into district plans. 

Looking back, though, the evidence justifies the Growth Forum’s original caution.

Auckland Region has suffered house price inflation because of the Metropolitan Urban Limits.  This was demonstrated in a 2007 study by Motu Research.  The data used show that between 1992 and 2004 section prices in Manukau grew from a 53% share of house prices to 89% (a 36 point jump).  In Auckland City they grew from 37% to 70% (up 33 points).  In Waitakere they went from 44% to 69%.  In contrast, national section prices grew from 40% of house prices in 1992 to 59% in 2004 (up just 19 points).  In other words, escalating land prices were a major contributor to housing inflation, especially in Auckland.

One result is that Aucklanders are voting with their feet.  A just-released analysis by Statistics New Zealand confirms that 18,000 more people moved from Auckland to elsewhere in New Zealand than moved in between 2001 and 2006.  This contrasts with a net inflow of 5,800 people ten years earlier.

The costs imposed by Auckland’s Urban Limits are not confined to housing.  They have distorted the market for industrial land, creating shortages and pushing up prices.  While recession may take pressure off temporarily, the damage is done.  Auckland has become less affordable for investment than other New Zealand and Asia-Pacific centers.  According to Bayleys Research, industrial land in Auckland in 2008 was seventh out of the ten most expensive locations in Asia Pacific, just behind Hong Kong, Melbourne, and Mumbai.  Consequently, manufacturing has been growing elsewhere in New Zealand but declining in Auckland.

 
Development 'Thinkpiece' (February, 2009) by Phil McDermott
In the lolly scramble for new infrastructure projects, it would pay to think carefully about how New Zealand – and the world – got into its current crisis. The common belief leading up to and since the financial meltdown was that assets had become over-valued, credit was running out of control, and savings had become dangerously low, especially in western nations. This situation was precipitated in part by the dramatic lowering of the price of consumer goods as capital for making things migrated to Asia. Here, it could take advantage of low costs, growing skills, and increasingly sophisticated logistics and distribution management as world transport and information systems became integrated.

One problem with this growth was that the people who were making things were not necessarily the people who were consuming them. And the people of Asia to whom wealth (principally in the form of US dollars) was being transferred were not necessarily lifting their consumption. At the same time, those of us in the new service and information economies had at our fingertips clever new schemes to sustain our spending.

The irony is that the democracies of the west are now trying to spend their way out of a global imbalance between production and consumption. The risk is that we transfer over-spending and unsustainable borrowing to the public sector and, in doing so, further reduce our productivity and competitiveness.

It has not just been householders who have developed lax spending habits. A decade of growing tax income and surpluses has led to fiscal sloppiness. The disciplines of economic analysis have given way to political expediency and populism as major infrastructure spending has been launched for example, with often inadequate analysis of need or demand, cost audits, or consideration of the indirect consequences of our decisions, or of the alternatives.

We now face the risk that kick starting the economy with major public works undermines our productivity further, literally digging us into a deeper hole. Yet this traditional Keynesian approach to riding out the troughs with the proceeds of the peaks in the business cycle, which Sir Robert Muldoon so effectively practiced, is not appropriate for the structural strait jacket we now find ourselves in.

Building capital intensive projects where there are obvious constraints on demand means that their rates of return will be low. Electrifying rail, for example, and yielding to the consequent pressure to link the western and southern lines by tunnelling through Auckland city will impose a very high marginal costs for what will be a limited gain in patronage. The result will be very low returns, and most likely a sharp reduction in the productivity of Auckland’s entire public transport system, at a substantial cost to taxpayer and ratepayer.

No-one quite knows where the current downturn will take us. There are no obvious or quick fixes. In the face of such uncertainty, big projects are likely, however, to reduce our flexibility and our capacity to respond to changes. We must therefore be very confident of the benefits of our infrastructure spending. We need to be sure that they will increase output across the economy rather than simply absorb valuable capital and crowd out smaller, more beneficial projects. The decision to re-evaluate the Waterview tunnels is sensible thinking in this context. The suggestion that an opening day bottleneck on the new Puhoi motorway extension (itself a highly dubious project in economic terms) somehow justifies four-laning SH1 To Warkworth is not.

What I would like to see from any contemplation of where we go from here includes a rigorous evaluation of major spending projects, especially for physical infrastructure.  Now is not the time for monumentalism.  We need to think how we can extract the most out of what we do have - through maintenance, perhaps rationalisation and appropriate streamlining of roads, rail, ports and airports, for example, through increased attention to more flexible public transport options that serve the entire region and not just narrow corridors, and so forth.

A good start has also been made on streamlining regulation.  The must be to increase out options for productive spending (within the capacity of the environment).  More can be done, though.  Over-consumption and easy credit may have been one facet of the asset bubble.  Rationing through regulation was another.  Land use planning in particular led to excessive costs for housing and industry.  The slowdown is not a signal that the pressure has come off.  Rather, now is the time to correct this.  Introducing liquidity through enhanced supply in the land market will bring down costs, assisting households and businesses to meet their needs.

There is another important initiative that must take precedence. We are facing tough economic times.  Looking after people must be our number one priority, and doing it directly may be a much better use of funds than simply relying on Think Big projects to prop up the economy and employment.  Training and retraining programmes need to be stepped up.  Capacity building among our disadvantaged communities, strengthening and reinforcing our training facilities, progressing Treaty settlements are critical to our long term economic capacity.  In short, investing in our social infrastructure, building our human resources, and looking to the resilience of our people may just have to take precedence over building bridges and tunnels.

From an economic point of view it is time to get back to basics – lower the cost of land, lift the capacity of our labour, and make sure we use capital effectively by making full use of what we already have and investing wisely at the margin.  Ideally, we will re-establish a balance between production and consumption.  At least we will be better prepared for the opportunities to move forwards beyond the current crisis if we are not locked into excessive public works that simply drive us into deeper debt as a nation.